Tax Credit Turns ALT Fuels into Cash for Government Fleets

A new federal alternative fuel tax credit went into as part of the 2005 Transportation Act. That’s good news for alternative fuel providers. It’s even better news for tax-exempt organizations like government fleets, which in some cases can receive cash payments for their alternative fuel use.

The tax credit is $0.50 per gallon of liquid alternative fuel or gasoline gallon equivalent (GGE) of compressed natural gas (CNG). The credit can be claimed by the entity that would be responsible for paying excise tax on the fuel. The fuel seller is responsible for paying excise tax when the fuel sale involves delivery of the fuel into a motor vehicle. For example, a retail fueling station that dispenses fuel from its equipment directly into customers’ vehicles pays the excise tax and claims the credit.

If the fuel sale does not involve direct delivery of fuel into a motor vehicle, the operator of the motor vehicle that eventually uses the fuel is responsible for the excise tax. For example, a fleet that buys alternative fuel in bulk and dispenses it into their vehicles using their own (or a third party’s) equipment pays the excise tax and claims the credit.

The benefit for taxable organizations equals the $0.50 per gallon credit minus the excise tax, which varies based on fuel type from $0.183 per gallon of propane or GGE of CNG to $0.243 per gallon of liquefied natural gas (LNG). Government and certain nonprofit organizations that qualify for the credit but do not have excise tax liability can receive cash payment from the federal government for the full $0.50 per gallon. This amounts to a considerable sum for tax-exempt organizations with large AFV fleets.

“We are very excited about the tax credit,” says Heloise Froelich, Environmental Supervisor with the Los Angeles Environmental Affairs Department, Air Quality Division, and coordinator of the Los Angeles Clean Cities Coalition. “One of our coalition members, the City of Los Angeles Bureau of Sanitation, has estimated the city could receive more than $1 million in payments every year from the use of LNG in its clean fuel refuse collection fleet of 260 vehicles.” Credits will accrue from other parts of LA’s nation-leading AFV fleet as well. A fueling contract negotiated with an alternative fuel provider at Los Angeles International Airport is already passing savings from the credit along to the city.

This credit applies to CNG, LNG, propane, and several other less frequently used fuels: P-Series fuels, liquefied hydrogen, liquid fuel derived from coal, and liquid hydrocarbons derived from biomass. The credit does not apply to ethanol or biodiesel. These fuels receive different incentives–see the Incentives and Laws section of the Clean Fleet Guide for information.

To claim the credit, alternative fuel users must register with the Internal Revenue Service and file a request for payment. For details, see NGVAmerica’s summary of the alternative fuel credit at and IRS Notice 2006-92 . The credit expires in September 2009.